RBI asks NBFCs to disburse cash loans only up to Rs 20,000: Report

This action is expected to largely curtail cash disbursements to people borrowing against gold, reported Reuters.

The advisory from the central bank follows recent regulatory measures taken against IIFL Finance, the country's second-largest gold loan provider, for breaches related to cash disbursement and other regulations, said the report.

Retail credit in India has seen a rapid surge, notably with gold loans witnessing a threefold increase over the past four years.

According to at least a dozen sources speaking to Reuters, a significant portion of these gold loans is being disbursed in cash.

India prohibits lenders from providing cash loans exceeding 20,000 rupees to customers, in line with income tax regulations.

Despite this, non-bank finance companies (NBFCs) have been disregarding this rule, issuing substantial cash loans while having customers sign an 'indemnity' to accept liability against potential income tax repercussions, as per Reuters sources.

This has prompted the Reserve Bank of India (RBI) to take a close look of non-compliant lenders, aiming to safeguard customer interests and prevent the accumulation of systemic risk, one of the sources told Reuters.

RBI in its letter reiterated the rule on Wednesday.

"Please refer to provisions of Section 269SS of Income Tax Act, 1961, which stipulates that no individual can receive more than 20,000 rupees as loan amount in cash," the central bank said.

"Consequently, no NBFC should disburse loan amount in excess of 20,000 rupees in cash."

The report citing sources said that non-bank lenders that give out loans against gold "have been facing intense competition from smaller players", pushing them to take "excessive risks like going above the cash disbursement limit", a source aware of the central bank's thinking said.